SKEW on TastyTrade

TastyTrade reviewed the SKEW on a recent segment of Market Measures. Their view it basically as an 'old school' way of viewing volatility.

The segment is important as they show that selling -0.3 delta SPY puts with 45 days-to-expiration when SKEW is higher (above >125 or  >135) is much more profitable and less risky than selling them all the time.

This conclusion is rather incomplete, in my opinion. Although selling puts when SKEW is high leads to great results, that is largely because after extreme readings (especially above 135) the SKEW often prints at an extremely low level, say below 120, within a few days. Those low prints after an extreme often mark the bottom of the SPX in the short term.

In fact, this reversal in SKEW is similar to the VIX speak that McMillan discusses and trades. Both are confirming indicators to get bullish. For that, in the money puts can be sold profitably with great success.

SPX does a head fake

What started out impressively bullish overnight, got nasty into the open, then nudged itself back to break even, then fell and bounced around to finish near its lows around 2143.

I added a regular size SPX put spread for November 9th at the 2060/2050 level for 85 cents, right at the close. As long as the market stays above 2120, this spread will die quick. However, with the election coming anything could happen.

The $TRIN was up above 1.24 and really piled on the gains in the last hour of trade. As I mentioned yesterday, Visa was weak after its earnings announcement. GM botched its forecast for the future also, and it went down 4.5%. Oil also fell. 9 of the 11 main sector ETFs were negative today, but the damage to the SPX was minimal really.

After hours AAPL said some scary things (I suppose) as it traded lower by about 2.5%. This has put some weight on the futures already, and so tomorrow's opening could be soft.

Volatility traded higher today, but not significantly. The volatility term structure remains bullish. The SKEW traded slightly lower, and is in a good place to trade on both the bearish and bullish side of the market.

We need to watch our little Iron Condor at 2150/2160 X 2130/2120 carefully as it expires on Friday. If the lower end comes under pressure tomorrow, I will move to out or just close it. The bear calls brought in a lot of premium ($4.35), so that is important to collect if we can.

Overnight bulls

The market opened higher after weekend merger news. This pushed the SPX up into the 2150 area, and put our 2150/2160 call spreads expiring Wednesday under pressure. I rolled them at the same strikes to Friday for an additional credit of $0.65. So, we have collected $4.35 in total on this spread.

Later in the day, I sold the same number of 2130/2120 put spread that expires on Friday for a credit of $1.35 to help offset any need to roll the calls further.

The 2190/2200 call spread expiring Friday that we traded in a half size position about a week ago is already nearly worthless, but because we only brought in a 50 cent credit, I will likely hold it through expiration.

As for the main trading indicators, the momentum line on the MarketForecast and the Stochastics are already high up in their ranges, so upside should be limited from here. With Visa down slightly after hours (even though it beat estimates), we should have the SPX under some pressure tomorrow.

Rather interestingly, the $TRIN traded higher today, especially on the open. So underneath the rally, traders were selling. Also, VXST rose today by about 6% from a level that has acted as support for the past month.

Near-term volatility rose today.

More call selling

SPX is not moving. I sold another call spread (very small position) - this time using the 2150/2160 (quite aggressive) on the October 26s. I received a credit of $3.70. I plan to close this out at half of the profit, once we get a pull back.

The market closed slightly lower today and even though most companies are posting decent earnings and guidance, the market is following the price of oil.

Volatility is low and falling. The SKEW is in the middle of nowhere around 123 and the percent of stocks above their 20 day moving average is around 41%. Nothing shows signs of great gains or a rapid correction. It seems like the trading range should continue with near term resistance somewhere around 2150 on the SPX.

Selling calls on the bounce

Today the SPX bounced higher (mostly overnight) and traded sideways until a small fade into the close. After hours news from Intel and Yahoo was not great, but not awful. We can expect more upside in the next few days if earnings come in positive, but to what extent will the rally go?

I traded a half size bear call position in the October 28s, using the 2190/2200 spread for a $0.50 credit. We still need the VIX to trade definitively lower below 15 and the SKEW to print below 120 to get bullish.

Only Sideways

The SPX continues to stay above the 2120 mark on closing basis. The market is slowly rolling over and is in a short-term down trend.

Meanwhile, most stocks trade below their important 20 day moving averages. In fact, so many trade below that level that the market seems to be getting critically oversold in the short term, as seen by the areas marked with pink boxes below.

Volatility indexes are rising in a slow and slight manner. Until the VIX closes below 14.5 this market could sell off hard and fast to mark the bottom of this pullback. 

Trading here is tough unless you want to play condors on the indexes and hope this long sideways action continues. I am waiting until we get the sell off in order to take a more directional trade.

Next week set up

With Monday being the first trading day of the new month, I would expect a bullish bias. I would feel more sure about those expectations had Friday been a down day - or at least flat. It was not.

All indicators are showing lack of direction in the markets by either flipping back and forth between a bullish and bearish bias or meaningless data. Market breadth is generally bullish, except on the big down days when it slips to bearish. The SKEW is middle of the road, showing no conviction to the upside nor fear of the downside.

The number of stocks above their respective 50-day moving average is converging to its middle around 55%. The market has gone sideways when we get stuck here.

MMTW is stuck in the middle of its range

The volatility complex generally has maintained a slight bullish stance all through the recent sell off. The short term VXST has spiked higher than the longer term measures of volatility, but has not been able to hold that bias. At the same time, all volatility indexes are demonstrating an upward trend in their low points. This could be interpreted as a bearish forewarning signal.

Volatility was low and is now trending higher. 

When VIX can break and hold above 15 there would be a larger sense of bearishness that would warrant a more directional position.